Comparing HELOCS to Reverse HECMs for Seniors

Older Americans over the age of 62 who own their home with a lot of equity may be considering pulling out some of their equity for various reasons.

Perhaps they want to invest in real estate or a business. Or, maybe they need the money to care for a loved one with a health problem. Whatever the reason, tapping equity to pay for needed expenses can be a financially savvy move. Senior home loans can be effective financial tools for smart homeowners that meet the reverse mortgage criteria.

What many seniors need to figure out is whether they should get a home equity credit line (HELOC) or a reverse mortgage loan. Which is best for various circumstances?

Take a few minutes and compare the HECM to the HELOC to determine which senior home loan programs is best for you.

A HELOC is a line of credit that is based on the equity you have in the home. You can draw on your equity up to your approved level by your lender.

An equity line of credit is a common option for people who want to get cash for things they need, as long as they have the income to make the payments. You do not need to be a certain age to qualify for a HELOC.

This type of mortgage differs from a ‘forward’ mortgage. With a reverse mortgage, the bank pays you based upon your level of equity in the property.

The most common reverse mortgage is the FHA Home Equity Coversion Mortgage or HECM. Payments are made to you in a lump sum, in monthly amounts or a line of credit.

The amount you get depends upon how much equity you have in the home. The loan does not need to be paid back until you die, sell or move. When one of these things happens, the lender will usually sell the home to pay the loan.

You do need to have a lot of equity in the property or own it free and clear. And, you must live in the home and be at least 62.

Considerations of a Reverse Mortgage

The line of credit with a reverse mortgage is guaranteed. Once you have been approved for your line of credit, it cannot be taken away. With a HELOC, you can have your line of credit reduced or pulled, depending upon your credit. This happened to many home owners during the last downturn.

The income is tax free.

If the home does not go up in value, your heirs will receive a smaller inheritance.

The mortgage is nonrecourse, so the lender cannot come after you for a deficiency in the case of foreclosure.

If you meet all reverse mortgage requirements, the amount that is made available will increase on a monthly basis. The amount will go up by a pre-determined amount every month, based upon the credit line balance the month before, and current rates. This gives you access to more funds every month.

Reverse mortgage is based upon the LIBOR index and has a ceiling of 5-10% above the initial rate.

No monthly mortgage payments required for a reverse mortgage

Upfront costs are much higher than a HELOC.

Adjustable rate that can go up or down over time.

You must continue paying your real estate taxes and insurance.

Considerations of a HELOC

An interest only home equity line of credit can be taken out by anyone who owns a home with equity in it, and suitable credit scores. A reverse mortgage only is available to those over 62 who own their home free and clear.

A HELOC does have monthly payments, but they are low during the draw period of usually 10 years, as the payments are interest only.

Closing costs of a HELOC are much lower than a reverse mortgage.

You must continue paying the real estate taxes and insurance on the property.

The mortgage is a recourse loan, so the lender can sue you for a deficiency in case of foreclosure.

There are many advantages to a reverse mortgage. The biggest is that you are receiving a large amount of cash from the home without any payments that you can use for anything you like. This can be a good move for an older American who needs cash to take care of a medical problem or wants to invest. But reverse mortgages are expensive in terms of closing costs and fees.

Reverse mortgages are complicated, however, and have down sides. If you want to leave money to your heirs, they will get less if you take out a reverse mortgage. For many people, a HELOC could be a good fit, if they have the income to make the regular monthly payments.

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